Using Porter's model identify and analyse the generic strategy pursued by Ryanair throughout the period covered by the case.
Q1. Using Porter's model identify and analyse the generic strategy pursued by Ryanair throughout the period covered by the case.
Porter (1998) suggests three generic competitive strategies that organisations can adopt and implement within their industry. These three strategies are: (1) Cost Leadership - where a firm seeks to be the low-cost producer in its industry, (2) Differentiation - where a firm seeks to be unique in its industry through features of its products that are highly valued, and (3) Focus - where a firm focuses on a segment in its industry using a low cost approach (cost focus) or a high differentiation approach (differentiation focus).
The case study shows that Ryanair was initially founded as an alternative to Aer Lingus, which was then the state monopoly carrier of Ireland. While plying routes between the UK and Ireland, Ryanair adopted a differentiation strategy, in which it was a full service airline with two seat classes and three different types of aircraft. The impact of the strategy was felt in five short years. By early 1990, despite a growth in passenger volume, Ryanair had accumulated losses of more than IR£20 million, and decided that a new strategy was necessary. Under the management of the newly appointed team headed by Michael O'Leary, it turned to the low-fare sector of the industry, which was under catered for at that time. Ryanair then changed its objectives and aimed to become Europe's "leading low-fares airline". According to Porter (1998), when a firm adopts a cost focus strategy, it "selects a segment or a group of segments in the industry and tailors its strategy to serving them". The case study shows that Ryanair wanted to target price conscious travellers. This strongly suggests that it adopted a cost focus strategy.
As a cost focuser, Ryanair was required to change its whole organisational culture to one which is much steeped in achieving the lowest cost possible, so as to provide a competitive advantage. It attempted to maximise productivity and lower cost in every aspect of its operations, from removing in-flight amenities to negotiating favourable rates for airport charges. Thus, Ryanair's strategy can be identified as cost focus. However, Porter's lack of definition of an "industry" while describing the generic strategies poses a few problems. It can be argued that although the low-cost sector constitutes to only 6.7% (see Exhibit 2, Appendix 1) of the whole market, it can be considered an industry by itself. If this view is taken, then Ryanair's strategy can be identified as cost leadership. The characteristics of an organisation adopting a cost leadership strategy is very similar to a cost focus one; Porter (1998) claims that "a low-cost producer...typically sell a standard, or no-frills, product and place considerable emphasis on reaping scale or absolute cost advantages from all sources.".
Ryanair has been consistent in pursuing its cost focus strategy. Its attitude towards achieving the lowest costs possible seems to be almost fanatical. It has managed to drive costs down by addressing levels in its value chain, for example negotiating better rates from its suppliers (Boeing and airports) In addition to the cost-cutting measures mentioned above, Ryanair has also lessened its dependence on travel agents by allowing direct flight sales through phone and its website. Competing on costs need not mean only achieving low costs. Maximising productivity in an operation area also constitute to saved costs. For example, the wages that Ryanair pays its pilots may be above the industry average, but since performance-related pay is used the pilots are more motivated and higher productivity ensues. Services like aircraft handling, engine and heavy maintenance that are contracted out to third parties also protects Ryanair from any potential industrial unrest, which can be very costly.
The extent to which Ryanair has been successful in achieving true cost leadership under Michael O'Leary's management can be seen in Exhibit 6 (See Appendix 1). From 1999 to 2000, the Passenger Load Factor decreased from 71% to 67%, and Break-even Load Factor decreased from 58% to 54%. However, the "available seat mile" (ASM) has increased by 35%. This is contributed by the relatively short distances on intra-European routes. Expenses created by an increase in ASM are passed on to the customer in higher fares, so the average passenger fare from 1999 to 2000 has also increased from ...
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The extent to which Ryanair has been successful in achieving true cost leadership under Michael O'Leary's management can be seen in Exhibit 6 (See Appendix 1). From 1999 to 2000, the Passenger Load Factor decreased from 71% to 67%, and Break-even Load Factor decreased from 58% to 54%. However, the "available seat mile" (ASM) has increased by 35%. This is contributed by the relatively short distances on intra-European routes. Expenses created by an increase in ASM are passed on to the customer in higher fares, so the average passenger fare from 1999 to 2000 has also increased from €55.33 to €60.09. This causes some concern, as Ryanair has emphasised that one of the main reasons for removing all the "frills" from its services was so that it could continue to provide cheap flights to customers.
Porter (1998) highlighted potential risks that companies adopting any of the three generic strategies might face. For a strategy competing on costs, the main risks are when competitors are able to imitate the strategy itself, or technology changes. When the target segment (in this context - price conscious travellers) becomes structurally unattractive, it also poses a risk to the company. This can happen when the demand for low fares disappears due to changing consumer tastes. Ryanair therefore needs to have a defensible position in the industry with relation to Porter's 5 Forces (see Figure 1, Appendix 2). The 5 Forces are: (1) Threat of new entrants, (2) Bargaining Power of Buyers, (3) Bargaining Power of Suppliers (4) Threat of new substitutes and (5) Intensity of Rivalry among the competitors. For example, Ryanair depends heavily on its suppliers like Boeing and the various airports for favourable rates of equipment purchases and landing fees. If there is a shift in the balance of power, Ryanair's cost focus strategy may no longer be profitable. This can also be demonstrated when alternative modes of transport to flying like trains or by sea are perceived to be more attractive (cheaper), since Ryanair's targeted segment are travellers who are only price conscious. Porter (1998) also points out that a generic strategy can be compromised by the temptation of growth, when it becomes "stuck in the middle". In the case study, Ryanair is the dominant player in the sector, and this risk is particularly high at this stage. According to Porter (1998), "focus involves deliberately limiting potential sales volume". Ryanair's "no frills" policy may have to change as they are actively expanding their flight route network and distance. It would be impossible for Ryanair not to provide meals on longer haul flights, and as a result their cost focus strategy may become blurred.
There are some limitations to the generic strategies theory in the sense that they may not always be easily applicable in practice. As mentioned earlier in this essay, Porter (1998) failed to define clearly what he meant by an "industry", and the vagueness of the term meant that Ryanair's strategy in the case study can be identified differently: as a cost focuser if the airline industry is considered in its entirety, or as a cost leader if the low-cost segment is seen as an industry on its own. The theory also hardly considers price as a factor, and he only suggest that a cost leader can set prices near industry average and earn higher profits due to lower costs. This has not been the case for Ryanair, and they continue to set prices lower than most of their competitors. Bowman's Strategic Clock may be a better tool for analysing the case study, as it focuses on pricing.
Q2. What strategic capabilities and assets allow Ryanair to pursue the generic strategy you have identified in Q1?
Ryanair has emphasised competition in costs throughout the case study. However, it is clear that pursuing the strategy successfully takes more than just trying blindly to achieve lower costs. According to Kay (1995), the distinctive capabilities or core competences of an organisation are what provide a competitive advantage. Stalk, Evans and Shulman (1992) defines a capability as "a set of business processes strategically understood". Johnson and Scholes (2002) state that strategic capabilities are about core competences - how resources are deployed into activities and hence create competitive advantage. In essence, during the period of the case study Ryanair has evolved from competing on costs to a capability-based competitor. The critical success factor of the sector was price, and Ryanair was very aware of it, judging from the valiant efforts to drive costs down.
One of the primary sources of distinctive capabilities identified by Kay (1995) is architecture. Architecture refers to the "network of relational contracts within or around, the firm." It can be further split into 3 types: Internal - with employees, external - with suppliers and customers, and network - with a group of firms in related activities. From the case study, Ryanair's efforts to become cost efficient displays its distinctive capabilities well. Ryanair has good relational contracts with its suppliers. It has been able to avoid high charges of congested airports by opting to land at secondary or regional airports. This is mutually beneficial, as these airports are eager to attract businesses since Ryanair can provide a high volume of traffic. Ryanair has also maintained good relations with Boeing since the start due to large orders in the past, and are thus able to obtain spares and maintenance services on favourable terms. Kay argues that in the internal architecture of a company, it should protect itself against opportunistic behaviour by employees, and that labour should be on a stable, relational contract. However, Ryanair has just done the opposite, offering performance-related pay to its pilots, commission to aircrew from sales of duty-free goods, and contracted out services like aircraft handling, engine and heavy maintenance to third parties. While this may not be in line with Kay's theory, there are many advantages. The no-frills policy of the company creates opportunities to increase efficiency and employee motivation through sales commission and excess total remuneration. For example, the absence of free in-flight services enabled cabin staff to earn commission on duty paid sales and in-flight refreshments. As a result, motivation of staff increased and the aircraft cleaning time in between flights were reduced, leading to higher productivity. Contracting out services to third parties also protect Ryanair from potentially costly industrial actions.
Hall (1993) examined 4 capability differentials identified by Coyne (1986) which are sources of competitive advantage. One of these is positional capability, which refers to past actions which have produced a certain reputation with customers, a view also echoed by Kay. Ryanair has the reputation of being the low fare airline in Europe. Another capability differential is cultural capability. This refers to the organisational culture of an organisation, and how it creates competitive advantage. Ryanair's culture is steeped in achieving low costs, with most habits, routines, beliefs, attitudes and values geared towards that objective, as described in the case study. These competencies are embedded deeply and Johnson and Scholes (2002) suggest that the cultural capability often refers to organisational knowledge, which cannot be easily imitated.
Kay (1995) indicates his third primary source of distinctive capability - innovation, as more appropriate for technological aspects. However, Ryanair's mix of cost drivers used to enhance cost efficiency can be considered an innovation in itself. For example, the establishment of Ryanair Direct Limited allowed Ryanair to improve its customer contacts and increase its sales of ancillary services such as travel insurance, car rental and connecting rail services. Furthermore, the company launched its website in 2000 and greatly reduced staff agents' commissions and computer reservation charges. The company lessened its dependence on travel agents to the extent that agents only generated 8% of sales. The majority of sales came from the website and Ryanair Direct. The strong performances of the launch of its website lead to a further decrease of 24% in marketing and distribution costs.
According to the case study, Ryanair allocated 50% of its seats to its lowest fare, which was significant compared to its competitors. This suggests that Ryanair attempts to fully utilise its aircraft, as an unfilled seat cannot be 'stocked' for later use, and some passengers may be attracted to fly just because of the cheap prices.
Experience is a strategic asset that Ryanair possesses. As the first low-fare airline in Europe, it had pioneer advantage which provided them with the important experience. Although Ryanair may have had to make mistakes as the "pioneer" company, experience is cumulative, and that only serves to let it become more efficient. Michael O'Leary is a unique resource to the company, and his knowledge and management style contributed much to Ryanair's success.
The robustness of the strategic capabilities and assets must be determined in order for Ryanair to pursue its strategy with success. According to Johnson and Scholes (2002), there are 4 main types of robustness (See Figure 2, Appendix 2): (1) Rarity - Michael O'Leary is considered a rare asset/ resource, but as an individual there is always a risk of him leaving the company e.g. retirement or to another company. (2) Complexity - The more complex a competence is the harder it is for competitors to imitate. One of the most complex aspects of an organisation is its knowledge base - not just of individuals like Michael O'Leary, but also knowledge that was gained over time. The relational architecture of the contracts with its suppliers may also prove to be too complex for competitors to imitate within a short period of time. (3) Causal Ambiguity - Competitors may have difficulty identifying the competencies that the success of the company is based on. (4) Culture - the competences may be so deeply embedded into Ryanair's culture that it is part of organisational knowledge which is tacit and difficult to imitate.
Ryanair needs to remember that it has to be aware of the dynamic business environment which is changing constantly. The current industry critical success factors will eventually become the norm, and new ones will emerge. Ryanair's quest for the lowest cost may also eventually be its downfall, since there has to be a limit to the number of amenities that can be removed before the threshold quality level of its service are breached when customers may no longer find it acceptable, regardless of how low the fares are.
References
De Wit, B & R, Meyer (1999) Strategy Synthesis, London, International Thompson Business Press
G, Johnson & K, Scholes (2002) Exploring Corporate Strategy, 6th Edition, Financial Times, Prentice Hall Europe
Hall, R (1993) "A Framework linking intangible resources and capabilities to sustainable competitive advantage", Strategic Management Journal, vol. 14, no 8; pp 607-618
Kay, J (1995) Foundations of Corporate Success, Oxford, Oxford University Press
Porter, M.E. (1998) Competitive Strategy - Techniques for Analyzing Industries And Competitors, New York, Free Press
Stalk, G., P. Evans & L.E. Shulman (1992) "Competing on capabilities: the new rules of corporate strategy", Harvard Business Review, vol. 70, no.2: 57-69, in De Wit & Meyer (1999): 221-231
APPENDIX 1
Exhibit 2 - European low-fare airlines' market share, 2000
AIRLINE
PASSENGERS
(000)
PERCENTAGE OF LOW-COST MARKET
PERCENTAGE OF TOTAL MARKET
Ryanair
6,939
34.6
2.3
Easyjet
6,262
31.2
2.1
Virgin Express
2,976
4.8
.0
Go
2,823
4.1
0.9
Buzz
,080
5.4
0.4
Total
20,080
00
6.7
Source: G, Johnson & K, Scholes (2002, pg 872)
Exhibit 6 - Ryanair selected operating statistics (euros)
999
2000
Passengers carried
4.8 million
5.5 million
Revenue passengers miles (RPM)
,643 million
2,103 million
Available seat miles (ASM)
2,304 million
3,126 million
Passenger load factor
71%
67%
Break even load factor
58%
54%
Average length of passenger haul
339 miles
382 miles
Average passenger fare
55.33 euros
60.09 euros
Average daily flight utilisation
6.47 hours
6.37 hours
Employees at period end
,203
,388
Employees per aircraft
57
53
Passengers per employee
4,035
3,963
Average yield per RPM
0.158 euros
0.157 euros
Average yield per ASM
0.112 euros
0.106 euros
Average passenger spend per flight
5.11 euros
3.91 euros
Adjusted cost per ASM
0.092 euros
0.085 euros
Average fuel cost per gallon
0.66 euros
0.63 euros
Source: G, Johnson & K, Scholes (2002, pg 880)
APPENDIX 2
Figure 1.
Forces Driving Industry Competition Adapted from Porter (1985, pp 4)
Figure 2.
Four sources of robustness Adapted from G, Johnson & K, Scholes (2002, pg 175)
